Employee Stock Option Plan (ESOP)
ESOP (Employee Stock Option Plan) is an effective employee retention strategy with which a company provides stock options to its employees so that they stick around and remain motivated. It offers employees an ownership interest in the company.
Documents Required from Directors, Shareholders
- Pan Card Copy (Mandatory)
- ID Proof (Any one) – Driving License/ Voter ID/ Passport Copy/ Aadhaar Card
- Address Proof – Latest Bank Statement/ Latest Telephone or Mobile Bill/ Latest Electricity Bill.(MUST be less than 30 days old)
- Passport Size Photograph
Documents Required for Registered Office Address
- NOC – No Objection Certificate from the Owner of the Property
- Address Proof – Latest Telephone Bill or Mobile Bill/ Gas Bill/ Electricity Bill (MUST be less than 30 days old)
How Does ESOP Scheme Work For You?
You can now provide employees stock options and make it an effective employee rention strategy.
Grant Notice
Options Agreement
Options Plan
Employee Stock Option Plan
Companies manage and hire top talent with ESOP (Employee Stock Option Plan)!
It is an employee benefits scheme under which the company encourages the employees to acquire ownership in the form of shares at a predetermined rate. Usually, companies issue ESOP to employees to make them stay with their organization for a long time. It motivates the employees to perform better and offer their loyalty to the company.
Suppose an employee receives 400 shares. On completion of every 1 year, 100 shares will be vested. The valuation of the shares increases with the valuation of the company. This also keeps a check on the attrition rate.
Why should we use ESOP?
- ESOPs are a tax-favored strategy that delivers fair value for shareholders.
- Employee Stock Option Plan allows for a “low and slow” ownership transition.
- ESOPs benefit the people who play a constructive role and remain in the company for a long time
- It creates tax-favored independent and sustainable companies.
- The Employee Stock Option Plan creates and preserves a legacy.
Benefits of Employee Stock Option Plan
Attract Top Talent
You may not be able to match their current salary, but an offer of shares in your company will be enough to attract the best talent.
Build Motivation
The better your business performs, the better your most talented employees will get paid. There's no better way to motivate them.
Keep Them Longer
The employees to whom shares have been allocated are almost certain to complete the four to five years you have defined as vesting period
Checklist/ requirement for Employee Stock Option Plan
- Check the articles for any specific provision on the issue of share under ESOP.
- The date and members of the compensation committee should be included in the board meeting.
- Notice of general meeting including the number of ESOP to be granted.
- Likewise, hold a general meeting for approval of shareholders by way of ordinary resolution. Additionally, include the authorization for the issue of shares under ESOP and the formation of the compensation committee.
- There must be a compensation committee (CC). The CC shall be a committee of board directors consisting of a majority of independent directors.
- Approval of shareholders by separate resolution.
- The requirement of a draft copy of certificates.
- Filing of Form-PAS-3.
- Disclosure in Director Report (DR).
- Maintenance of register of ESOP in SH-6 at the registered office of the company or such other place as the board may decide.
- Entities in the register shall be authenticated by CS or any other person authorized by the board.
Who is eligible for ESOP?
According to the IRS (Indian Revenue Service), the maximum age an employer can impose to be eligible for an ESOP is 21. Moreover, he/she must be eligible for ESOP in the year of joining the company. An employer can restrict eligibility to employees with two years of service but only if the plan has immediate vesting.
How to structure an Employee Stock Option Plan
- Determine whether other owners are amenable.
- Conduct a feasibility study.
- Conduct a valuation.
- Hire an ESOP attorney.
- Obtain funding for the plan.
- Establish a process to operate the plan.
How to register an Employee Stock Option Plan
Draft The ESOP Rules
Your ESOP rules set out the terms that apply to all options granted under the plan, including the process for granting options, how and when employees can exercise their options, and what happens to the options on an exit event, or if an employee leaves. The document will include the following schedules:
- Schedule 1: A grant letter setting out the terms of the options you want to grant to recipients.
- Schedule 2: The form of the exercise notice to be delivered to the company when an option holder wants to exercise their vested options.
- Schedule 2: The form of the exercise notice to be delivered to the company when an option holder wants to exercise their vested options.
- Schedule 3: An option certificate which records the number of options, exercise price and vesting provisions.
Approve The Rules And The Option Pool
Once you are satisfied with the ESOP rules, your directors and shareholders will need to sign some corporate approval documents to adopt the ESOP rules and set up your option pool.
Board And Shareholder Approval
There are some resolutions which include:
- The approval of the Employee Stock Option Plan rules.
- The total number of options in the ESOP pool.
- Authorization for the board to grant options to recipients of their choosing, and
- Authorization to issue shares on any exercise of the options.
Shareholder Waivers And Consents
Your constitution and shareholder’s agreement may include pre-emptive rights on the issue of new shares. If this is the case, these shareholders with preemptive rights will need to sign a waiver in respect of any options granted the ESOP.
Grant your options
Prepare Your Directors’ Resolutions:
Each time you want to grant options, you should ask your corporate secretary to prepare a new set of directors resolutions in writing, approving the grant of options to a specific recipient.
Send Each Recipient Their Grant Letter:
- Once you have received the letter, you can issue them their option certificate. You can find the option as the certificate form in schedule 3. Here the schedule should be left blank and a separate option certificate provided to the recipient. That is, you need to create a fresh, separate word doc.
Update Your Register Option
Internally, you should also be keeping an option register, which is a record of all the options the company has granted, the vesting schedules, expiry dates, and exercise dates.
Documents required for Employee Stock Option Plan
- Minutes of a board meeting.
- Special resolution approving ESOP along with the explanatory statement.
- Minutes of the general meeting.
- Boards report.
- Register of employee’s stock option plan.
- PAS- 3, MGT- 14.
Why Efinac
Legal Assistance
We execute legal work for over 1000 companies and LLPs every month, by leveraging our tech capabilities, and the expertise of our team of legal professionals. Come on board and experience the ease and convenience!
Realistic Expectations
By handling all the paperwork, we ensure a seamless interactive process with the government. We provide clarity on the incorporation process to set realistic expectations.
Team
With a team of over 300 experienced business advisors and legal professionals, you are just a phone call away from the best in legal services.
Recent Updates
Ed-Tech Start-up Unacademy, all set to buy back Employee Stock Option Plans (ESOP)
October 16, 2020
For the 2’nd time in several years, Unacademy will buy back ESPOs from its 145 employees by the end of 2020. An estimated 30 crores will be spent to buy back ESPOS from present and former employees after they achieved ‘unicorn’ status in September.
Oyo’s ESOP Balance Increases by Rs. 1054 Crores
September 28, 2020
With the significance of Employee Stock Options (ESOP) increasing within the startup community, more and more organisations are increasing their ESOP pools on behalf of their employees.
As a result, Oyo has added 2700 shares to its existing ESOP pool, increasing it by Rs, 1054 crores, bringing the Oyo’s ESOP pool to a total value of Rs 4,304.5 crores.
FAQ
Yes, the private limited company can approve ESOP to its employees subject to the limitation of the maximum number of shareholders.
Usually, when a company is sold, the ESOP will terminate and the employee-owners receive cash proceeds for their company stock. In some cases, your company may be sold to a company with its own ESOP. Normally, this happens in a rollover of some or all of your ESOP shares into the shares of the new company ESOP.
To review means to look back over something for evaluation or memory.
